The Keystone XL pipeline is irrelevant
The Keystone XL pipeline will make no measurable contribution one way or another to global climate change, Rapier writes. The arguments against it convey a false impression of the most important drivers of global carbon emissions.
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As pipeline routes reach capacity, the decision to move by rail comes down to three factors: 1). The cost of rail shipping; 2). The price of crude oil at the destination, and; 3). The differential in the price of crude at the origin and the destination. The Bakken-Brent differential averaged about $20/bbl in 2012. According to a recent investor presentation from Valero (NYSE: VLO), the company can ship Bakken crude by rail to the West Cost for $9/bbl, to the East Coast for $15/bbl, or to the Gulf Coast for $12/bbl. This is the reason crude transport by rail in the US has exploded. Yes, shipping by pipeline is less expensive, but shipping by rail is still economical at such a wide Bakken-Brent differential.Skip to next paragraph
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The future of oil sands development depends not on whether Keystone XL is approved. It depends on a sustained high price for waterborne crudes. With heavy Canadian oils trading at a greater than $40/bbl discount to Brent in 2012, it’s no wonder that rail transport of oil in western Canada is also skyrocketing. Over the past two years — from the April 2011 through April 2013 — the volume of oil shipped by rail in western Canada nearly quadrupled, rising from less than 46,000 bpd to more than 177,000 bpd.
Transport of heavy oil from the oil sands is expected to increase by another 60,000 bpd this year. If the differential remains high, expect the growth rate to be high, as it was in the Bakken. (I am unaware of anyone predicting 5 years ago the extent to which oil would be moved by rail from the Bakken, but the Bakken-Brent differential was very high and drove investment decisions).
As a result, Canadian rail companies like Canadian Pacific Railway (TSX: CP, NYSE: CP) and Canadian National Railway (TSX: CNR, NYSE: CNI) are turning in the best quarterly results in their histories. They are investing capital in expanding their crude oil transport capabilities. Analysts expect this trend of oil via rail to continue, with estimates that 10% of Canada’s oil production will be transported by rail by 2015.
Logistical constraints haven’t thus far prevented oil sands production from growing exponentially for the past two decades. In just the past 10 years, Canadian oil sands production has grown by 1 million bpd. This didn’t happen because Canada had a million barrels of spare pipeline capacity 10 years ago. It happened because many logistical projects were executed as production increased.
As we have already seen in the development of the Bakken in the US — and in the rapid rise in rail transport of oil in Western Canada over the past two years — if the price is right the oil will find its way to market. Logistical problems get solved when the price of oil is high enough. I believe this is the single biggest oversight of protesters who believe that by shutting down Keystone they will stall development of oil sands.